Investment memos

Caltagirone SpA – More “Hidden” Value

5th December 2015

We have not posted about one of our core holdings, the Caltagirone complex, for a while. In summary despite the security going up 11.6% since we initiated the position the discount to our fair value has remained broadly the same and the overall quality and certainty of the margin of safety has improved. Below we detail the main changes since our lost post on Caltagirone and we will also be increasing our holdings in CALT IM by another 2.5% to 5.0% at market open.

1. Vianini Lavori Take Private / Grandi Stazoni

On the 15th May 2015 FGC Finanziaria, a company controlled by Francesco Gaetano Caltagirone, made an offer of EUR 6.8 per share ex-div to buy out the 28.1% of Vianini Lavori not controlled by the Caltagirone group which represented a 16.8% premium to the 3 month average trading price immediately preceding the announcement date. In the offer Caltagirone stated that they would delist the entity if their offer was successful and at the a shareholders meeting on the 22 October 2015 it was announced that over 90% of Vianini’s shares were controlled by connected parties and they would be proceeding with a squeeze out and delisting.

We cannot fathom why the minority shareholders tendered their shares into this offer given that, excluding any value for Vianini’s stake in Grandi Stazioni, the offer represented a 48.9% discount to the value of the listed securities and cash net of all obligations that Vianini held. In fact, as we saw with Genterra, the controlling shareholders could fund the entire take out of the minorities with cash on the balance sheet.

Given the discount to a very conservative fair value we didn’t look further into Caltagirone’s motivations at the time or consider whether there was any other value we should have been taking into consideration. However, we know think that a big part of their motivation in this takeover was the upcoming privatisation of the Italian railway assets known as Grandi Stazioni in which Vianini has a stake through its 40% interest in EuroStazioni.

As a quick reminder Grandi Stazioni S.p.A. is a member company of Italy’s Ferrovie dello Stato (English: State Railways) group and was created to rehabilitate and manage the 13 biggest Italian railway stations. The company is 60% controlled by Ferrovie dello Stato and 40% controlled by EuroStazioni which is a consortium of private investors including the Benetton Group, Pirelli, SNCF and Vianini Lavori which has a 32.741% stake.

Interestingly it was reported at the beginning of July by Italy’s equivalent of the FT that the state was looking to sell Grandi Stazioni by the end of 2015 (article can be found: here). Having dug a bit deeper we were able to find a number of articles putting the price tag at EUR 1.0bn which we assume is a TEV not equity value (see example here).

With a bit more moderate sleuthing (and frankly something we should have done in our initial underwrite of the Caltagirone group) we were able to find the 2014 accounts of Grandi Stazioni with a view to trying to test the credibility of the rumoured EUR 1.0bn price take which you can find here.

It turns out that Grandi Stazoni is basically a real estate company which earns rent from commercial tenants located in the stations. Taking the latest annual accounts we stripped out the advertising and other revenue assuming a suitable EBITDA margin to arrive at the “clean” real estate earnings. Assuming a EUR 1.0bn TEV and adjusting out the value of the other businesses you would need to believe a purchaser would be willing to acquire the railway stations for a 5.6% rental yield or better. This would seem fair looking at CBRE data on Italian prime commercial rental yields which range from 4.00 – 5.50% (research can be found here). None of this gives any value to the Czech railway stations which they are currently redeveloping. We have included our workings on Grandi Stazioni valuation below:

Grandi Stazioni Valuation

 

All in all the additional value from Grandi Stazioni adds an additional 17.7% value to the Vianini stake which equates to 18.4% of the current CALT IM market cap.

Finally, in tracing all of this back we also noticed that we goofed up our initial memo by only attributing value from Caltagirone’s 50.045% direct stake in Vianini and missing an additional 6.426% stake that they held indirectly. This is worth an additional 14% of the current CALT IM market cap

So all in all we have “discovered” an additional 30% of value in Vianini when considering the market cap.

2. Caltagirone Editore

When we recommended an investment in the group Caltagirone Editore was EBITDA negative. This has now reversed with the group posting positive LTM EBITDA of EUR 3.2m driven by two things: (i) stabilisation / recovery in advertising revenue, and; (ii) continued effective cost cutting. Depending on the levels of employee and other provisions that get crystallised during 2015 the business will still burn a small amount of cash but not much. Below we have laid out all the quarterly financial and operational KPIs we could find in CED IM’s reporting so you can judge the performance of the company for yourself:

CED IM KPIssee pdf

To be clear CED IM is not out of the woods yet by any means particularly as the online contribution as a % of the total advertising revenue is only 11.6% as of Q3 2015. However, we still continue to hold a small position in CED IM as we believe that a discount of 53% to cash and listed securities represents a dislocation to fair value given the performance of the underlying business.

3. Cementir

Quick health warning that this asset represents a meaningful part of the CALT IM value story and we have not done a huge deep dive on it (obvious comment but you should always do your own diligence as this post shows we often make mistakes).

For the first 9months of 2015 Cementir has roughly stayed flat posting 0.7% revenue increase and a (1.9)% decline in EBITDA. Using Cementir’s LTM EBITDA to Sep 2015 the business is trading at a 7.2x multiple which seems inline to slightly cheap to the other albeit larger cement players such as Holcim, HeidelbergCement etc. At a high level the biggest concern that we have about Cementir is that it generates c. 28% of its revenues and c. 32% of its EBITDA in Turkey which is a potentially overheated economy and also has a higher political risk associated with it that we would normally be comfortable with.

CALT IM’s stake in Cementir represents 34% of our total fair value and it you excluded any value for Cementir then CALT would be trading at a 45% discount to our view of fair value.

4. Updated Valuation

See below for our updated valuation of CALT IM, in short we believe that it is trading at a 41.1% discount to fair value based on the current trading value of each listed entity and a 63.9% discount to our view of fair value.

Caltagirone Valuationsee pdf

Our full workings can be found here

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Track Record

HIPS Performance Track Record (Q3 2015)

HIPS Performance Tracker Q3 2015

We continue to be disappointed with how much time we are actually spending on security selection and the blog which is reflected in the fact that 9 months into the blog we have only deployed 12.5% of our assets.

In the quarter we monetised Genterra Capital Inc after the owners made a combined take private and spin-off bid for the company. Whilst we were very disappointed with the clear undervalue the take private offer represented we were able to exit in the secondary market at an implied valuation of SpinCo that was ludicrously high and generated a profit of 72.8% / 1.72x MoM and an IRR of 162.3%.

Despite only deploying 17.5% of our portfolio at the peak we are up 2.8% net of costs for the first nine months against (1.8)% for the passive portfolio which is 95% invested.

Jubii Europe has reached the buy price we set in our previous article and we intend to revisit that security in the near future. In the meantime we have summarised developments during the quarter for our holdings below

Emerson Radio (MSN US)

We increased our position in Emerson to 7.5% of the portfolio post the late release of their 10K as: (i) the major risk of a negative outcome on the IRS tax investigation had been removed with Emerson achieving a positive outcome vs our case, and; (ii) the stock was trading below our entry price despite this positive news. Emerson’s main issues remain the underperformance of their white goods business and the resolution of the restructuring / liquidation of Emerson’s major shareholder, Grande Holdings, couples with the potential for bad acts by the controlling shareholder.

Since increasing our position Emerson released its June 2015 quarterly results in August which highlighted two areas of concern. The first relates to the profitability of their white goods business post revenue decline of 26.4% in the quarter which was in excess of management’s expected 15.0% decline due to discontinued lines by their customers. We had previously highlighted a concern that with lower customer orders Emerson may not benefit from the same competitive pricing from their suppliers that they were able to achieve on a higher order volume. This concern would appear to be being borne out by the fact that gross margin declined to 7.0% which is the lowest level since Q1 2014.

However, a much larger concern around the white good business is that Emerson management have actually increased their SG&A vs Q2 2014 by 11.2%. This is absolutely staggering and really needs to be addressed as the business is clearly in decline and now EBITDA negative. We remain of the view that the company should sell its white goods business or at the very least cut costs to the bone.

The second issue that is concerning us is that despite a large decrease in revenues trade receivables actually increased by $5m. It is also surprising that inventories have remained flat. We have stated in the past that the Emerson white goods business has a significant positive working capital balance (now $22.1m) and we would expect to see cash released as the white goods business declined. We hope this is just a timing issue as if not it would further point to the poor management of the business by FTI, the board and the executive management team.

Looking at the filings of the Grande Holdings liquidation they are still in the same dance of a perpetually delayed publication of their restructuring circular which is concerning as the restructuring is supposed to be wrapped up by December 2015 (seems very unlikely). As discussed before the process is very opaque and the controlling creditor / shareholder has engaged in questionable dealings both with Emerson and Grande so we will just have to keep close eye on developments.

Our updated fair value range for Emerson is $2.38 to $2.95 which ascribes no value to the white goods business and assumes the full $4.8m of dividend tax liabilities. Acquiring the stock today at $1.23 you are getting the valuable licensing business for free as the estate trades below cash. Furthermore even if you run rate Q2 2015 negative EBITDA from the white goods business and assume no working capital benefit the operating free cash flow yield would be c. 12.5%. We believe the investment thesis remains intact but will closely monitor developments at Grande as well as management actions at Emerson.

Caltagirone SpA (CALT IM)

The only major update in this story is that FCG Finanziaria, a holding company of Francesco Gaetano Caltagirone, made a takeout offer at €6.8 per share for the remaining shares of Vianini Lavori not owned by the connected parties of the Caltagirone Group. It has been recently confirmed that they have got to the 90% threshold in order to delist the company and will proceed to do so.

FCG’s offer represented a 16.5% premium to the last three months trading price but is still a 41.9% discount to our view of fair value (which does not give any value to their construction business).

Included below is our valuation of the Caltagirone complex both at investment date and as of Q3 2015 which shows that the only meaningful moves in valuation have been: (i) the increased market price of Vianini Lavori, and; (ii) the share price of Caltagirone SpA.

Caltagirone SpA Value Evolution

Caltagirone Editore SpA (CED IM)

Since our investment the CED IM’s discount to fair value has increased by 3.3% despite the underlying performance of the business significantly improving. In Q2 2015 the business posted positive EBITDA of €1.3m vs a loss of €0.4m in Q2 2014 representing an overall profitability improvement of €1.7m vs a similar improvement of €1.2m in Q1 2015. These improvements have meant that the business has moved from a €3.7m cash burn in H1 2014 to a €1.9m cash generation in H1 2015 which is a sterling effort.

The negative is clearly that revenues continue to decline with the positive performance in EBITDA being driven by continued cost cutting. Whilst CED IM’s online revenues are increasing strongly (11.5% increase in the quarter) we expect the need to see revenue stabilisation to see a real re-rating in the stock.

Hopefully the Caltagirone family will look to take advantage of the clear mispricing of CED IM in a similar way to Vianini Lavori although obviously we would hope it is at a price which more closely reflects fair market value.

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Investment memos

Caltagirone Group Initiation

INITIATION – BUY Caltagirone Spa (CALT IM) @ €2.27

INITIATION – BUY Caltagirone Editore (CED IM) @ €1.00

I wanted to post on the Caltagirone group which is a conglomerate of mainly Italian businesses owned by Francesco Gaetano Caltagirone an Italian billionaire ranked number 258 on the Forbes list.

The collection of companies is varied but broadly consists of (i) cement, (ii) Italian focused construction / concession businesses, (iii) newspapers and (iv) stakes in listed companies (mainly financials). Also the inter-related nature of ownership is pretty complicated and I have attached a corporate structure chart for ease of reference (took me some time to pick it apart).

Would be interested to hear from anyone who has looked at the group, particularly Cementir (cement business) where I have spent less time/have less knowledge. There are multiple potential investments across the group all trading at substantial discounts to fair value but I have decided to initiate a 2.5% position in both Caltagirone (HoldCo) and Caltagirone Editore (newspapers) as explained below.

[one health warning is that I did the bulk of my work in Jan 2014 but have only just got round to writing it up so there might have been some changes to the below during Feb and March]

Caltagirone Spa

Share Price: €2.27

Market Cap: €230.6m

Free Float: 12.4%
Ave. Daily Traded Volume: $62,000

Discount to Fair Value: 63.8%

 

Caltagirone is the group holding company and trades at a 46.3% discount to current listed stake values and a 63.8% discount to my assessment of fair value

The main constituents of value are as follows:

Asset Market Value (€m) My Valuation (€)
  Vianini Lavori SpA 123.7 256.2
  Vianini Industria SpA 19.2 44.8
  Capitolium SpA 4.5 10.4
  Calt 2004 Srl 239.5 239.5
  Parted 1982 SpA 30.2 73.0
  Cementir Holding SpA 12.7 12.7
TOTAL 429.8 636.7
Caltagirone SpA Market Cap 230.6 230.6
Discount / (Premium) to FV 46.3% 63.8%

I will go through each constituent below but so that you can match up the table: Capitolium owns 12.6% of Vianini Industria, Calt 2004 owns 30.1% of Cementir and Parted 19982 owns 35.6% of Caltagirone Editore (also helpful to look at the attached corporate structure with reference to the table)

Vianini Lavori

Share Price: €6.01

Market Cap: €263.2m

Free Float: 33.1%
Ave. Daily Traded Volume: $143,099

Discount to Fair Value: 49.2%

Vianini Lavori has been listed on the Italian Stock Exchange since 1986 and was originally a pure play construction company but has since diversified into services, concessions and financial investments. The company has 40 employees an runs its construction interests through dedicated, project specific, JVs & SPVs

My valuation of Vianini L is as follows:

  • Investment Property – €3.0m, Dec 2014 balance sheet carrying value
  • Cementir Holdings – €273.5m, current market value of their 25.5% stake
  • SAT SpA – €27.5m, sale price of their stake in Feb 2015
  • Parted 1982 – €9.1m, value of their 3.6% indirect stake in Caltagirone Editore
  • Available for Sale Investments – €228.7m, current market value for stakes in ACEA, Generali and Unicredit
  • Cash – €46.6m, Dec 2014 balance sheet carrying value
  • Provisions – €(12.4)m, Dec 2014 balance sheet carrying value
  • Other Liabilities – €(48.9)m, Dec 2014 balance sheet carrying value
  • Financial Liabilities – €(9.0)m, Dec 2014 balance sheet carrying value
  • Net Value – €518.0m

In my valuation I have not given credit to the two material assets of the company

1. EuroStazioni SpA

  • A joint-stock investment company based in Rome that owns 32.7% of Grandi Stazioni SpA a company that manages and rehabilitates 13 major Italian railway stations
  • EuroStazioni has assets of €163.9m against virtually no liabilities for a book value of equity owned by Vianini L of €56.6m as of Dec 2013
  • Unfortunately there is no disclosure on Grandi Stazioni so you cannot tell how levered it is, the current performance of the business etc. The only solid sign in the reporting that things are ok is that EuroStazioni currently pays a dividend to Vianini L

2. Metro C Scpa

  • A consortium company responsible for the construction of the Line C of the Rome Metro System where Vianini L has a 34.5% stake
  • Metro C has a book value of equity of €51.7m and the group looks to have c. 60% debt to assets
  • Again very little data on this one but the first section of the Rome C metro line was opened in Nov 2014 and there are 9 additional stations still under construction. The company has communicated that the total project is worth €1.0bn to Vianini L

In addition to these assets the company has other concessions (e.g. Metro B) and for FY 2014 generated €5.2m of EBITDA (down from €9.1m) which effectively drops down to cash (excluding working capital fluctuations) as the company has no capex and little tax.

I have decided not to include these assets in my valuation underwrite for the following reasons: (i) disclosure is very poor so I have little confidence in the book values, (ii) I really do not like concession businesses as it is very difficult to tell if the contract is performing and you often only get stung right at the end. If these businesses continue to perform I think they could represent and additional 50% upside to this stock or 25% more margin of safety on the downside. What is also helpful is that all the companies are owned in separate entities which protects Vianini L from business failure contamination against the other assets

Vianini Industria

Share Price: €1.28

Market Cap: €38.5m

Free Float: 33.2%
Ave. Daily Traded Volume: $19,812

Discount to Fair Value: 55.4%

Vianini Industria is engaged in the production of cement focused on railway sleepers, blocks for tunnels, tanks for railway, large-diameter pipes for aqueducts and poles for power lines. Massive health warning that the company does not produce accounts in English so my comments below are the result of google translate and data from other parts of the group

My valuation of Vianini L is as follows:

  • Parted 1982 – €7.3m, value of 2.9% indirect stake in Caltagirone Editore
  • Generali Shares – €32.7m, 1.8m shares at current market value
  • Cementir Shares – €17.6m, 1.6% ownership stake at current market value
  • Cash / (Net Debt) – €28.8m
  • Net Value – €86.4m

Rightly or wrongly, as with Vianini L, for the purposes of my valuation I have ignored the operating business. In the case of Vianini I it is clearer cut as the total ascribable value is very small. For the 9 months to Sep 2014 the business did €8.9m of revenue, basically €0 EBITDA and had c. €1.0m of D&A which would imply the business is likely to burn a small amount of cash (assuming D&A is a good proxy for ongoing maintenance capex). As of Sep 2014 they currently have €12m of revenue backlog (excluding €9.0m of additional contract options) so it does not seem the business is dying, just nothing to write home about or value to “bank on”.

Caltagirone Editore

Share Price: €1.00

Market Cap: €123.9m

Free Float: 34.6%
Ave. Daily Traded Volume: $31,966

Discount to Fair Value: 50.6%

Caltagirone Editore was founded in 1999 (after the purchase of the newspaper Il Messaggero and Il Mattino) and has been listed since Dec 2000. Today it owns 6 newspaper titles, 1 TV station, an ad agency and a web portal.

My valuation of Caltagirone Editore is as follows:

  • Cash / (Net Debt) – €133.0m, Sep 14 balance sheet
  • Other Liabilities – €(30.0)m, Sep 14 balance sheet
  • Unicredit stake – €44.2m, current market value
  • Generali stake – €103.5m, current market value
  • Caltagirone Editore – €[?]m
  • Net Value – €250.6m

Unlike Vianini L & I, I have spent a good deal of time on the Caltagirone Editore business to assess whether it can (i) be profitable / valuable in the future, or; (ii) get to breakeven either of which I think will be the catalyst for a re-rating of the stock

Key points on the market and Caltagirone’s place in it are as follows:

  • Caltagirone is the second Italian newspaper group with c. 22.5% share of average daily readers behind Gruppo Editoriale Espresso and in front of RCF and Poligrafici Editoriale
  • It has the 4th most visited news website in Italy (almost the same size as number 3) with 475k users compared to leading website La Repubblica which has 1,225k average daily users
  • Caltagirone has strong regional leadership in Lazio (68% vs nearest competitor at 29.3%), Campania (70% vs 23%), Grande Salento (88.2% vs 32.8%) and Marche (74% vs 47.3%). In addition it holds number two positions in Veneto (31.2%) and Abruzzo & Molise (19.5%)
  • Pulling its six titles together Caltagirone commands reader leadership in Central Italy with a 61.4% share of average daily readers vs its nearest competitor, Gruppo Espresso, at 28.3%
  • It has been growing strongly online with daily users growing by 63% YoY and internet advertising growing by 35.9% YoY. All their major newspaper titles have an internet site as well as apps for both ipads and iphones
  • On a macro note Italy has the third lowest internet penetration in the European Union standing at 58.5% of total population, only Romania and Bulgaria are lower. This compares to countries such as the UK (89.8%), Germany (86.2%) and France (83.3%)
  • Also Italy has one of the highest number of small & medium enterprises (“SEMs”) in the European Union as well as low level of urbanisation (ranked 69th in the world)

My summary take away from work on the Italian newspaper market is: (i) Caltagirone has material presence and is a market leader in c. 1/3 to 1/2 of the country, (ii) the macroeconomics of Italy suggest that a regional newspaper business should have a reason to exist given the high number of SMEs (driving local advertising) and the relatively low level of urbanisation (significant population and readership value lives in the regions) and (iii) the low level of internet penetration should give the newspapers the time to retain market share and transition onto online vs countries where google etc. had eaten the newspapers lunch before they realised it.

Unfortunately the financials of the company tell a mixed story. Taking the key constituents in turn:

1. Revenues

  • Have been falling every year since a peak in 2008 of €326.9m to today Sep 14 LTM of €172.2m although the rate of decline has slowed significantly in the last two years
  • Average daily readers have also declined from a peak of 5,598 (Dec 2008) to 4,136 as of Dec 13. Most concerning is that there seems to have been an acceleration in the rate of decline from (2.1)% in 2010 to (6.5)% in 2012 to (12.2)% in 2013 (unfortunately I only have annual data and I can only get access to quarterly data by paying a meaningful subscription fee for a specific data set. If anyone has it I would love to see their average readership comped to their last three years of quarterly data to prove out the point later on that the decline rates are slowing)
  • Looking at circulation revenue per reader the business has been able to put through price increases and get it from a low of €40.7 per reader in 2010 to €50.1 in 2013 meaning that from peak to trough they have seen circulation revenues decline from €91.8m in Dec 2007 to €75.6m in Dec 2013 (17.6% total decline). The price rise in 2013 may also explain the jump in reader decline rate from 6% to 12%
  • Where the business has been getting absolutely drilled is in advertising revenue per reader which has declined from a high of €103.5 in Dec 2007 down to €65.1 in Dec 2013 which in total revenue terms is a decline from €210.6m to €98.3m (53.3% total decline)
  • What is encouraging / important is that it seems the advertising revenue per reader has stabalised at c. €65 as it was only down from €65.9 per reader in Dec 2012 vs €65.1 in Dec 13. Also if you compare advertising revenue decline for LTM Sep 14 like for like (“LforL”) vs Dec 2013 LforL it is a 5.3% decline vs 6.9% most of which will be driven by declining readership
  • Finally LTM Sep 14 circulation revenue is down 4.2% LforL vs an increase of 2.8% in Dec 2013 LforL which I think is explained by Catlagirone not increasing prices in 2014 compared to 17% increase in 2013. If I am correct in this assumption then 4.2% decline would be a proxy for lost readership which would be a good result for the business vs previous years

2. Costs

  • The management have done an excellent job of keeping costs at bay particularly when you consider that it is Italy where the employee has the upper hand vs the company
  • Management has attacked all cost areas and has achieved annualised savings since 2007 of 10.1% in raw materials, 5.2% in personnel and 6.9% in other operating costs
  • To put this in context personnel costs per reader were €54.8 in Dec 2013 vs €54.48 in Dec 2007 and they have reduced the workforce from 1,253 down to 940
  • They have also taken raw material costs per reader down to €13.7 from €18.1 from Dec 2007 to Dec 2013 and other operating costs to €52.3 down from €56.1
  • Looking at LTM Sep 14 LforL the group has reduced costs by 7.9% vs a revenue decline of 5.5% leading to an 68% improvement in EBITDA profitability (sadly it is still negative)

3. Cash flow

  • On an LTM Sep 14 basis the business is running at €(2.3)m negative EBITDA
  • Other consistent cash outflow items are employee provisions (e.g. libel litigation) which has run at c. €4.0m per year since 2007
  • The business has positive net working capital so it should release cash as the business shrinks (for the purpose of this exercise I have assumed 0 inflow)
  • Capex (tangible and intangible) has run at an average of €1.5m per year
  • Income taxes have been c. €3m per year (driven by the fact that some papers are profitable)
  • Net cash interest is positive about €3.5m per year due to large cash balance
  • Dividends from equity stakes of €2.0m per year
  • Expected net cash burn per year of c. €5.0m per year

In addition to the above it is worth noting that the group is structured such that each newspaper title sits in a separate corporate entity owned by a the TopCo (Caltagirone Editore SpA). Examining the unconsolidated parent accounts of Caltagirone Editore it shows that substantially all the cash sits at this entity as well as the Generali shares (I am not entirely sure where the unicredit shares sit but I think they are in one of the SPVs). I see this a material contributor to your margin of safety in this investment as it means that if one or all the newspapers are ultimately unviable they could be put into bankruptcy without impairing or creating an additional liability against the cash and equity investments held by Caltagirone Editore.

Finally this is a situation that I think will get worse before it gets better. Whilst on an LTM basis the business is outperforming on an EBITDA basis that is because Q1 2013 was a stinker (-ve €5.3m of EBITDA). Comparing 9M 14 vs 13 the business is down €1.1m of EBITDA vs last year due to poor performances in Q2 and Q3 and unless there is a material outperformance in Q4 FY 2014 will likely show a negative FY 14 result vs FY 2013. However, none of this justifies the enterprise trading at a 50.6% discount to net debt and available for sale assets whilst ascribing no value to the newspaper business.

Cementir Holdings

Share Price: €6.75

Market Cap: €1,073.3m

Free Float: 24.8%
Ave. Daily Traded Volume: $2,007,528

Discount to Fair Value: n.a.

Cementir Holding is an Italian multinational company that produces and distributes grey and white cement, ready-mix concrete, aggregates and concrete products and has been listed on the Italian exchange since 1955

This is the part of the Caltagirone empire that I have not done as much work as I would I would like due to (i) lack of spare time and (ii) the fact that it is a large company with a €1bn market cap so I somewhat trust the market to get it directionally right (famous last words)

Today Cementir has:

  • 15 Cement production plants of which 4 in Italy, 4 in Turkey, 1 in Denmark, 1 in Egypt, 2 in the USA (in jv with Heidelberg and Cemex), 1 in China and 1 in Malaysia
  • 15 (million/ton.) Cement production capacity
  • 2 State-of-the-art research and development centres in Italy and in Denmark and 1 laboratory in Turkey
  • 20 Terminals
  • 112 Ready-mix concrete plants of which 16 in Italy, 83 in Scandinavia and 13 in Turkey
  • 1 Cement products plant in the US
  • 3 Waste management plants of which 2 in Turkey and 1 in England

In the last ten years the group has grown significantly through acquisitions financed through cash flow and debt. Their EBITDA stands at €169.7 as of Dec 2013 vs a peak EBITDA of €274.1m in Dec 2007. Their current EBITDA margin is 17.2% and has been as high as c. 24% (bear in mind they have made a couple of small acquisitions since 2007).

Looking at their EBITDA contribution the two biggest regions are Denmark and Turkey which represent 80% of H1 2014 EBITDA with Italy as the only negative EBITDA contributor (vs €51.2m of EBITDA contribution in 2007). Cementir’s 2014-2016 business plan has them achieving €240m of EBITDA against €70-75m of capex with the majority of growth being driven from Scandinavia, Turkey and the Far East.

The business is 100% financed by bank loans and they have a very good maturity profile with c. 10% maturing each year and 25% after 7 years.

At Cementir’s current market cap the enterprise is trading at a TEV of €1,565m which equates to c. 7.5x EBITDA . There isn’t a great comp set for Cementir but here it goes:

  • Titan Cement – 13.3x
  • Vicat – 10.9x
  • Cimpor – 6.7x EBITDA (LTV based on market cap is 83%)
  • Cementos Portland – 16.1x EBITDA (fake number as this is a distressed debt case)

On balance I am happy to underwrite Cementir at the current market value given (a) reasonable valuation on current EBITDA, (b) significant growth prospects, (c) stable geographies (Turkey and Scandi) and, (d) low leverage. Interested to hear from anyone that has looked at the company in more depth than myself

Conclusion & Recommendation

 

Based on all of the above I think Caltagirone SpA is a compelling long at €2.27 given (i) material margin of safety across 3 of the 4 major subsidiaries, (ii) low or no leverage in each company and (iii) reasonable diversification away from Italy (cement, cash, equity investments etc.)

The drawback to the long Caltagirone is the lack of obvious catalyst as well as the very small free float at only 12.4% of the outstanding shares.

I also think that Caltagirone Editore is a long albeit much more risky that the Caltagirone SpA. As of today Editore’s market cap reflects half the value of cash and liquid equities which are uncorrelated to the performance of the newspaper group. The management of Editore have demonstrated exceptional talent in managing the costs of the business in the face of a relentless decline in advertising revenue which seems to be levelling off. Finally it does not make sense to me that the market is ascribing a negative value of €126.7m to the second largest newspaper group in Italy with a leading market share in the central Italian regions which although EBITDA negative is only burning c. €5.0m of cash a year.

Editore is a very tough equity story but I think at the current prices you are getting a multiple year option on the business breaking even / stemming the decline in an environment where the decline rates have substantially softened and with a management team that has a proven track record of cost cutting over the last 7 years. All of your downside protection (cash and listed equities) sits in a corporate box which should not be contaminated in a downside case of the failure of the 6 newspaper titles and even if the end result is a €0-5m EBITDA business the market should reflect the full value of the cash and listed equities which will yield a substantial return even over a long period.

In terms of sizing this trade in my portfolio I have decided to initiate a 2.5% position in both Caltagirone SpA and Caltagirone Editore. My sizing decision in Editore reflects the risky nature of the investment and the fact that FY 2014 results are likely to be poor and I want to have fire power if the share price becomes stupid in the future. I found it harder to size my exposure to Caltagirone SpA as the valuation discount is so compelling but I have kept it at 2.5% because of (i) liquidity / free float of the stock and (ii) lack of obvious catalyst to close the value gap vs Editore.

I have decided not to initiate long positions Vianini Lavori because of the opaque and volatile nature of large construction concessions and in Vianini Industria because of its size and the quality of the railway sleeper business. I feel that a stake in Caltagirone SpA gives me exposure to either of these companies “knocking it out of the park” whilst ensuring a margin of safety in case something goes wrong on the construction contracting end. I have not spent enough time on Cementir to initiate it as a conviction long in its own right plus it lacks the complexity / hair that makes me feel like I would be picking up an inefficiently priced security due to market over reaction

Where could I be wrong?

  • In buying both securities I am adding exposure to Italy which has a very weak macro outlook in my opinion and could certainly get worse from here
  • Cementir represents a material portion of the value in Caltagirone and I have not completely torn it apart to make sure there are absolutely no gremlins in the company
  • I view large ticket concession businesses as high risk (particularly if you add the fact that it is in Italy) and they could be the source of negative headlines / value destruction
  • Caltagirone Editore is a declining business and I am ascribing full value to the cash and equities it owns on the basis that management will be able to stem the decline without material cash burn. I am making a bet that (i) the slowing decline rate in advertising spend and customers continues and (ii) management can continue to cut costs out of the business to ultimately improve EBITDA. If either of these things change the cash burn at the business could materially increase from €5.0m per year
  • Caltagirone SpA lacks a defined catalyst that would act to close the substantial valuation discount that exists today

Caltagirone Group Memo (2015.03.15)

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